Marilyn MacGruder Barnewall began her career as a journalist with the Wyoming Eagle in Cheyenne. During her 20 year banking career, she wrote extensively for The American Banker, Bank Marketing Magazine, Trust Marketing Magazine, and other major industry publications. The American Bankers Association (ABA) published Barnewall’s Profitable Private Banking: the Complete Blueprint, in 1987. She taught private banking at Colorado University for the ABA and trained private bankers in Singapore.

Monday, September 09, 2013

How the Nation's Only State-Owned Bank Became the Envy of Wall Street

The Bank
of North Dakota is the only state-owned bank in America—what Republicans might
call an idiosyncratic bastion of socialism. It also earned a record profit last
year even as its private-sector corollaries lost billions. To be sure, it owes
some of its unusual success to North Dakota’s well-insulated economy, which is
heavy on agricultural staples and light on housing speculation. But that hasn’t
stopped out-of-state politicos from beating a path to chilly Bismarck in search
of advice. Could opening state-owned banks across America get us out of the
financial crisis? It certainly might help, says Ellen Brown, author of the
book, Web of Debt, who writes that the
Bank of North Dakota, with its $4 billion under management, has avoided the
credit freeze by “creating its own credit, leading the nation in establishing
state economic sovereignty.” Mother Jones spoke with the Bank of North
Dakota’s president, Eric Hardmeyer.

Mother Jones: How was the bank formed?
Eric Hardmeyer: It was created 90 years ago, in 1919, as a populist
movement swept the northern plains. Basically it was a very angry movement by a
large group of the agrarian sector that was upset by decisions that were being
made in the eastern markets, the money markets maybe in Minneapolis, New York,
deciding who got credit and how to market their goods. So it swept the northern
plains. In North Dakota the movement was called the Nonpartisan League, and
they actually took control of the legislature and created what was called an
industrial program, which created both the Bank of North Dakota as a financing
arm and a state-owned mill and elevator to market and buy the grain from the
farmer. And we’re both in existence today doing exactly what we were created
for 90 years ago. Only we’ve morphed a little bit and found other niches and ways
to promote the state of North Dakota.
MJ: What makes your bank unique today?
EH: Our funding model, our deposit model is really what is unique as the
engine that drives that bank. And that is we are the depository for all state
tax collections and fees. And so we have a captive deposit base, we pay a
competitive rate to the state treasurer. And I would bet that that would be one
of the most difficult things to wrestle away from the private sector—those
opportunities to bid on public funds. But that’s only one portion of it.
We take those funds and then, really what separates us is that we plow those
deposits back into the state of North Dakota in the form of loans. We invest
back into the state in economic development type of activities. We grow our state
through that mechanism.
MJ: Clearly other banks also invest their deposits. Is the difference that
you are investing a larger portion of that money into the state’s own economy?
EH: Yeah, absolutely. But we have specifically designed programs to spur
certain elements of the economy. Whether it’s agriculture or economic
development programs that are deemed necessary in the state or energy, which
now seems to be a huge play in the state. And education—we do a lot of student
loan financing. So that’s our model. We have a specific mission that was given
to us when we were created 90 years ago and it guides us throughout our
history.
MJ: Are there areas that you invest in that other banks avoid?
EH: We made the first federally-insured student loan in the country back in
1967. So that’s been a big part of what we do. It’s become almost a
mission-critical thing. I don’t know if you have been following the student
loan industry lately, but it’s been very, very interesting as many have decided
to leave. We will not though.
MJ: So you are able to invest in certain areas because they provide a
public good.
EH: Yeah, or a direction, whether it’s energy or primary sector type of
businesses. We have specific loan programs that are designed at very low
interest rates to encourage activity along certain lines. Here’s another thing:
We’re gearing up for a significant flood in one of the communities here in
North Dakota called Fargo. We’ve experienced one of those in another community
about 12 years ago which prior to Katrina was the largest single evacuation of
any community in the United States. And so the Bank of North Dakota, once the
flood had receded and there were business needs, we developed a disaster loan
program to assist businesses. So we can move quite quickly to aid with
different types of scenarios. Whether it’s encouraging different economies to
grow or dealing with a disaster.
MJ: What do private banks think of you?

EH: The interesting thing about the bank is we understand that we walk a
fine line between competing and partnering with the private sector. We were
designed and set up to partner with them and not compete with them. So most of
the lending that we do is participatory in nature. It’s originated by a local
bank and we come in and participate in the loan and use some of our programs to
share risk, buy down the interest rate. We even provide guarantees similar to
SBA to encourage certain activity for entrepreneurial startups. Aside from
that, we also act as a bankers’ bank or a wholesale bank. So we provide
services to banks, whether it’s check clearing, liquidity, or bond accounting
safekeeping. There’s probably 20 other bankers' banks across the country. So we
act in that capacity as kind of a little mini-fed actually. And so we service
104 banks and provide liquidity to them and clear their checks and also we buy
loans from them when they have a need to overline, whether it’s beyond their
legal lending limit or they just want to share risk, we’ll do that. We’re a
secondary market for residential loans, so we have a portfolio of $500 to $600
million of residential loans that we buy.

MJ: So what’s the advantage of a
publicly owned “bankers’ bank” instead of a privately owned one?

EH: Our model is we use our deposit
base to help [other banks] with funding their loans, even providing fed funds
lines with our excess liquidity—we buy and sell fed funds and act as a
clearinghouse for check clearing activity. That would be the benefit or
different model. We’re a depository bank and can bring that to bear.

MJ: If other states had a bank like
yours, do you think they would have been more insulated from the credit crisis?

EH: It all gets down the management
and management philosophy. We’re a fairly conservative lot up here in the upper
Midwest and we didn’t do any subprime lending and we have the ability to get
into the derivatives markets and put on swaps and callers and caps and credit
default swaps and just chose not to do it, really chose a Warren Buffett
mentality—if we don’t understand it, we’re not going to jump into it. And so
we’ve avoided all those pitfalls. That’s not to say that we’re completely
immune to everything, certainly we’ve bought some mortgage-backed securities
and we’re working through some of those issues, but nothing that would cause us
to be concerned.
MJ: Would states with your model have any new tools to get out of the
credit crisis?
EH: Let me put it to you another way and tell you another thing that we do.
We also provide a dividend back to the state. Probably this year we’ll make
somewhere north of $60 million, and we will turn over about half of our profits
back to the state general fund. And so over the last 10, 12 years, we’ve turned
back a third of a billion dollars just to the general fund to offset taxes or
to aid in funding public sector types of needs.
MJ: Not bad for a state with a population of 600,000.
EH: Right. And here’s another thing: Back in 2001, 2002, when we went
through the dot com bust, all the states suffered some sort of budget
shortfall, including the state of North Dakota. At that time our budget
shortfall was fairly insignificant--$40 some million. And so it was quite easy
to overcome that. The governor just simply said alright, we’re going to turn
back 1 percent of all general fund agencies, and the Bank of North Dakota, you
will declare another dividend to make up the balance. And so we did that. Our
capital was in a fine position to go ahead and do that. So in some cases we’ve
acted as a rainy day fund. MJ: And now the current downturn seems to have bypassed you.
EH: The State of North Dakota does not have any funding issues at all. We
in fact are dealing with the largest surplus we’ve ever had. So our concern is
how do we spend it wisely and make sure we save it for the future.
MJ: It’s not a bad problem to have.
EH: Yeah. We’re a little bit of an island here, and so we look around and
we say boy that is unbelievable to see what is going on in the rest of the
country and here we are completely countercyclical.
MJ: Are other states interested in your model?
EH: In my stint here as president, which as been about 9 years now, I’ve
had a lot of inquiries from other states about how this works, could it work
for them. And my predecessor, who is now the governor of the state of North
Dakota, has in fact testified at a couple of other state legislatures in terms
of setting up the same model. Up until a year or two ago I would have bet that
it would never happen.
MJ: It’s funny, because North Dakota is traditionally a red state and yet
you have these institutions—some people might say they’re socialist.
EH: Yeah, I’ve had that thrown at me many times.
MJ: But is seems like they are very popular in the state.
EH: Yeah, and of course the socialism theme has become in vogue lately,
been thrown about a bit.
MJ: Aside from political opposition from bank interests, do you think it
could be viable for other states to implement your model?
EH: So much of what is going on right now is a knee-jerk reaction to some
things that have happened, where regulations and accounting practices weren’t
where they should be. So my advice is everybody take a deep breath and we’re
going to get through this and we are going to exit this as a stronger industry
than when we went into it, with controls in places that are absolutely
necessary, with banks understanding the risks they are taking. For all states
to look at North Dakota’s model and say this would be the panacea to all those
things, I don’t see that happening.
MJ: It’s clearly not the only solution, but I’m curious whether it could be
part of it.
EH: Possibly. It just depends on what they want to do with it. We’re using
this to spur economic growth for our state, to provide niches where others
aren’t comfortable, whether it’s in-state financing of residential loans or
making student loans. Every state has their own particular needs. We’ve carved
out a pretty good niche here and I think are well-respected by our peers in the
banking industry. They look at us as partners and not competitors. That would
be the key if you were to do this in any other state is to replicate that part
of our model. That’s where you really open yourself up for criticism, is
state-owned businesses competing with the private sector.
MJ: Could a bank like yours be set up without sucking deposits out of
private banks in the short term?
EH: I imagine you could do some sort of bond issue where you would use that
as your funding source.
MJ: After seeing the credit crisis unfold, has it changed your opinion of
what you do?
EH: It just reinforced what we do, and that is you stick to what you
understand, you do it well, you know your customers. We’ve never been a bank
that tries to hit home runs. That’s not what we’re all about. We have a
specific mission which is more important. Most corporations and banks, their
top priority is to maximize shareholder return. And that is a nice byproduct
for us because we do have a nice return—an NROA [return on net operating
assets] of 2, a ROE [return on equity] of 25, 26 percent. But really where we
take the most satisfaction is making sure we meet the needs of the state and
finance those types of things that make our state go forward.

About Me

Marilyn MacGruder Barnewall began her career in 1956 as a journalist with the Wyoming Eagle in Cheyenne. During her 20 years (plus) as a banker and bank consultant, she wrote extensively for The American Banker, Bank Marketing Magazine, Trust Marketing Magazine, was U.S. Consulting Editor for Private Banker International (London/Dublin), and other major banking industry publications. Barnewall taught private banking at Colorado University and has authored seven banking books, one dog book, and two works of fiction and one biography.
Barnewall is the former editor of The National Peace Officer Magazine and has written editorials for the Denver Post, Rocky Mountain News and Newsweek, etc. She has written for News With Views, World Net Daily, Canada Free Press, Christian Business Daily, Business Reform, and others. She has been quoted in Time, Forbes, Wall Street Journal and other national and international publications. She can be found in Who's Who in America (2005-10), Who's Who of American Women (2006-10), Who's Who in Finance and Business (2006-10), and Who's Who in the World (2008).